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July 28, 2014

Hedge Fund Winners and Losers in First Half

Event-driven and North America-focused funds ride high

Event-driven hedge fund strategies were up 5.2% in the first half.

Hedge fund strategies come in and out of favor as the economic environment they thrive in ebbs and flows.

The event-driven strategy has been riding high as the leading strategy benchmark for the past two years, thanks to consistent performance, and it topped the charts again in the first half of 2014, according to alternative investments data provider Preqin.

The strategy was up 5.2% through June 30, compared with the overall hedge fund benchmark return of 3.9%.

Investors have taken notice, Preqin reported. Event-driven was the second most searched-for strategy during the second quarter after long/short equity, replacing macro, which had been the place holder in that position for some time.

Moreover, 12% of all fund launches in the first half used the strategy, a proportion that has held steady over the past six quarters.

Not so fortunate were funds that employ a multi-strategy approach. These posted a first half return of 3.2%, below the overall benchmark.

Launch activity also tapered off, with just 3% of all hedge funds rolled out in the first half having a multi-strategy component.

Preqin noted that some institutional investors remained interested in multi-strategy funds. Thirteen percent of all searches initiated in the first half used a multi-strategy approach, down slightly from the last six months of 2013.

Hedge funds that invest in North America outperformed those focused on all other regions in the first half, according to Preqin. Returns for the six months to June 30 averaged 6%.

North America-based firms represented approximately 70% of all hedge fund launches in the first half, and the proportion of new funds with a North American focus also increased.

Preqin reported that institutional investors based in North America continued to drive inflows into the hedge fund sector, and accounted for 46% of all investor searches initiated during the second quarter.

It predicted that North America would continue to drive the growth of the industry going forward.

Preqin’s report from the Eastern Hemisphere were not so bright.

Asia/Pacific-focused hedge funds foundered in the first half after having delivered returns of more than 8% in both the first and second half of 2013.

The Preqin Asia/Pacific benchmark averaged 2.4% in the first six months of 2014, making it the worst performing regional benchmark in that period.

Fund launches focused on the region reflected the recent performance.

Just 9% of all hedge fund launches in the second quarter had an Asia/Pacific focus, the lowest proportion of quarterly fund launches represented by the region since for fourth quarter of 2012.

Activist hedge funds have been growing in prominence in recent years, according to Preqin, often delivering higher returns than other hedge fund strategies.

In the first half, activist funds returned an average of slightly more that 5%, compared with a 5.4% return during the same period in 2013.

Last year saw the largest number of activist fund rollouts since 2007, followed by further launches in the first half.

Activist hedge funds currently have more than $100 million under management, Preqin said.

In Europe, hedge funds that comply with the EU’s Undertakings for Collective Investment in Transferable Securities directive returned just 2.3% in the first half of 2014.

A UCITS fund can be sold to any investor in the European Union under a harmonized regulatory regime after it has been registered in one EU country.

Preqin reported that launches of UCITS funds had slowed; in the second quarter, they represented only 3% of all new hedge funds.

It said the slowdown likely had to do with uncertainty surrounding the introduction of the EU’s Alternative Investment Fund Managers Directive.

This directive, according to law firm Dechert, is the most significant EU regulation of alternative investment funds in recent times, and will affect a wide range of asset managers, whether they are based in the EU or outside it.

Despite the uncertainty, Preqin said, many investors within Europe remain interested in this regulated fund structure. Fourteen percent of all investor mandates in the second quarter included a search for UCITS-compliant funds.

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